Travelers to keep evaluating reinsurance, but likely retain more risk than peers


US primary insurance giant Travelers will continue to evaluate its reinsurance arrangements, dependent on market conditions. But, in the face of elevated catastrophe weather losses, the company is likely to retain more than its peers, as “we like our underwriting”, CFO Dan Frey said.

As we reported on Travelers third-quarter 2023 results announcement, the insurance company saw its nine month catastrophe losses to almost $2.9 billion by the end of September, which is significantly higher than the nine-month 2022 figure of just over $1.4 billion.

During the Travelers quarterly earnings call today, CEO Alan Schnitzer noted that price increases have been critical to keep rate ahead of loss costs in general.

“As a result of strong pricing in recent years and higher fixed income NII, returns in the segment are currently attractive,” Schnitzer said.

Adding that, “Nonetheless, given the uncertainty generally in terms of weather volatility, economic and social inflation, hardening reinsurance market and the geopolitical landscape, we plan to continue pursuing strong price increases in both the property and casualty lines to achieve our overtime return objectives.”

CFO Dan Frey highlighted the significant weather loss burden that elevated Travelers catastrophe losses in 2023.

“Our third quarter results include $850 million of pre tax catastrophe losses, resulting from another quarter of both frequency and severity of weather across North America,” Frey said. “The significant level of catastrophe losses we’ve experienced this year resulted in lower year-to-date earnings than we expected.”

Michael Klein, EVP and President of Personal Insurance at Travelers, provided some additional colour as to how significant a quarter Q3 was for cat losses.

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He explained that, “This was another active quarter for severe convective storms across the US. There were 19 designated PCS events specifically related to wind, hail and tornado activity in the quarter, nearly twice the 10 year average and the highest number for a third-quarter in more than a decade.”

Asked about Travelers plans for its reinsurance and whether the firm’s non-renewed catastrophe aggregate reinsurance treaty could have assisted in the last quarter, CFO Frey said it wouldn’t have.

“I don’t think that the changes we made would have had much of a difference,” Frey said. “The last few years we’ve had that underlying cat aggregate treaty. We didn’t attach it at all in 2022. We didn’t renew it in 2023. In 2022, when we had that underlying cat ag treaty, we placed about 50% of a $500 million layer. So it couldn’t have been more than $250 million of recovery and it cost us a lot to have that policy, the rate-on-line was very high for that coverage.”

Frey went on to add that Travelers did buy more reinsurance at the mid-year renewal season, adding a hurricane focused coastal reinsurance treaty at July 1st.

Frey added, “I think we’ll just continue to evaluate our position and what’s available to us in the marketplace, from a reinsurance perspective as we look forward to 2024.

“But I’d say, we’re really pleased with our risk selection, we think we do a great job of segmentation and pricing. We’re going to probably keep more net than many of our peers, because at the end of the day we like our underwriting.”

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Suggesting that, with reinsurance pricing and terms as they are Travelers is unlikely to look to replace the missing aggregate coverage, and if it had been able to renew it this year, it may well not have attached anyway, even under the elevated weather loss conditions.

Further driving home just how elevated those catastrophe weather losses have been for Travelers, CFO Frey said, “There is clearly an uptick in catastrophe activity this year.”

Frey further explained, Last quarter, in the 91 days of the quarter, there were 88 days in which there was a PCS event occurring.

“In the third quarter there were 92 days in the quarter. On 91 of those 92 days there was a PCS event occurring.

“So, the increase in catastrophes is the combination of several factors. One, is there do seem to be more storms more frequently. Two, more people have moved into harm’s way, in terms of where the demographic spread of risk is. And three, inflation has resulted in the impact of those costs being higher.”

Travelers experience is likely to be echoed by other major nationwide US insurers with large property books of business and serve to further drive home why some companies are moving out of harms way, by pruning or moderating certain climate, weather and catastrophe risk exposures.

Retaining more risk seems inevitable for all of the US insurance players, given the constraints now placed on their reinsurance buying.

So the test will be, do they like their own underwriting (as in the case of Travelers), or do they start to relinquish and downsize certain areas of their property insurance business, suggesting they perhaps found the taste of their own underwriting less palatable.

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